Middle Market Captives – an old product with a new sense of urgency
The Worker’s Compensation market continues to tighten, especially since insurance companies now use a .96 combined loss ratio in the market as the breakeven point between making a profit or a loss. For middle market companies struggling to lower their operating costs, the use of captives is a more appealing option, mainly for transferring risk off of their balance sheet or for other wealth planning considerations.
Middle market companies are generally described as those with a total premium range from $250,000 to $2,000,000. In the past, it’s been thought that captives were only available for risks generating a premium well over $2,000,000. Here are two important terms which will help bring down captive eligibility for middle market clients:
The first, 831(b) Captive, allows a tax advantage for qualifying small Captives. If the Captive receives less than $1.2 million of premiums each year, it may elect to be taxed only on its investment income. Therefore, premiums are not taxable income. The main advantage to a Sec. 831(b) Captive is that the Captive is able to accumulate surplus from underwriting profits free from tax. A Captive that utilizes a proper risk management strategy can thus accumulate significant assets within a short period of time. Still, the IRS has put certain conditions on the captive in order to prevent it from being viewed as a tax shelter. Captives can be flexible but a complex instrument which can have significant noninsurance benefits (i.e. Establishing Estate and Retirement Plans, plus Asset Protection.)
The other is a Group Captive is an insurance company owned and controlled by its members. Members are like companies within similar industries or similar risks. It’s important to note that the members are better risks in their class and being the best in class means more money in return. As a result, a middle-market client in a Group Captive can control its insurance costs, reduce overall costs, and improve the insurance program. With an exchange of ideas within the group, captive members may consider incorporating nontraditional lines of insurance into their policy, such as Employee Benefits, Pollution, Supplemental Life and Medical stop – loss.
Middle Market Captives may not fit every risk. However, for companies whose premiums fall into specific categories and who meet certain requirements, the option may be well worth consideration.
About the Author
David Bardelli is a Senior Vice President in the Property & Casualty Group and the Casualty Practice Leader for WGA. David has extensive knowledge with casualty risks, including technology healthcare, business services and miscellaneous manufacturing groups of all sizes.